Emerging Economies To Move Towards Gradual Recovery, Grow At 4.7% in 2017: Morgan Stanley

Growth in emerging market economies is showing signs of stabilisation and the rate of growth is expected to improve to 4.7 percent in 2017 compared to 4 percent growth clocked in 2016, according to a Morgan Stanley report.

Manufacturing growth and industrial production are at their best levels since mid-2015s. This, coupled with improved external demand, and better consumption growth, have ensured macro stability and set the framework for a gradual recovery.

While most emerging economies have also kept a tight rein on monetary easing in order to arrive at this macro stability so far, Morgan Stanley expects more central banks to ease as inflation moderates.

But how robust is the macro improvement in emerging economies and can headwinds like a possible interest rate hike by the U.S. Federal Reserve or a slowdown in China’s economy derail the recovery? The investment bank says in its report that emerging markets are better prepared for these external risks.

Fed Rate Hike to Cause Another Taper Tantrum?

Markets are currently pricing in a Fed funds rate of 0.7 percent (as reflected in the Fed futures) compared to the height of the taper tantrum in 2013, when markets expected a Fed funds rate of almost 1.5 percent by December 2015, the report points out.

Emerging market themselves are currently much better placed to deal with a rate hike, thanks to an improvement in macroeconomic indicators like real interest rates and inflation, compared to 2013 and 2015, the report adds.

China Slowdown A Continued Threat?

China’s debt and excess capacity may lead a further slowdown in the country’s economy. But the slowdown is expected to be gradual as China’s policymakers stick to gradual adjustments and take care of the excess capacity, the report says.

While the aftereffects of what is happening in China may continue to be a “drag” on emerging markets, risks of shocks stemming from the country are relatively subdued.

Another Brexit? No, Thanks.

Though a U.S. Fed hike or a slowdown in China may not be catastrophic, a recession in the United States or any of the developed markets such as Japan, Germany, Australia etc., can slow down external demand, weighing on the growth trajectory of emerging economies.

Additionally, another political and economic shock like Brexit might prove to be a setback for emerging markets that are looking for more stability in policies and productivity trends.